Self-Employed?

Being self-employed has its benefits.  You can choose the hours and you are the boss.  However, when it comes to getting a mortgage, you face more hurdles.  You have to provide more paperwork than an employee and must work harder to prove that you can afford the mortgage.

If you are self-employed, it is important to understand:

• Why it is harder for self-employed to get a mortgage
• What a lender looks for in a self-employed applicant
• Adjustments made to your income

Getting properly prepared to apply for a mortgage is good advice for every borrower.  You need to work on improving your credit score, keeping a clean credit history, lowering your debt to income ratio, and saving money for a down payment.  Make sure that you prepare to qualify for a mortgage.

Self-employed: Harder to get a mortgage?

It is harder for a self-employed borrower to get a mortgage.  Not only do self-employed applicants have to provide more information and documents, but those documents are much harder to read and correctly interpret.  Here are some of the reasons lenders have a harder time giving a self-employed applicant a mortgage:

• Income is harder to predict
• Business debt can also be a personal liability
• Small businesses fail at a high rate
• It is costlier and more difficult to underwrite the loan

Lenders determine the income figure they will use, after reviewing your tax returns and financial statements. Your attempt to lower your taxes (less income and higher expenses) can definitely conflict with lender’s debt-to-income requirements. You may only qualify for a smaller mortgage than you anticipated getting.

What is a Lender Looking for in a Self-employed Borrower?

In order to qualify for a mortgage; the most important factor you need to show the lender is that you have the ability to make your monthly payments on time.

Here are some of the main issues a lender will look at when determining if a self-employed borrower can afford to repay the loan:

Income: Is your income stable? How likely is it to continue and at what levels? The lender will look to see if there are any significant changes, or gaps in your income history.

Earnings: What are the trends and sources of your earnings? Keep in mind that lenders will look to see if there are any significant changes in your income. In general, they will not average your income over the last two year.  Instead they will take the lower of the 2-year average or last-year income.

Asset Liquidation: Lenders will look to see if you are liquidating any assets that might lower your income flow.

Documentation: Lenders require more documentation including 2 years of signed federal tax returns and all applicable schedules.